I'm trying to work this problem out myself. But in my case I want to login with CocoaMySQL. But I knew it wouldn't let me connect becuase I've tried it in the past with various other applications.
There's a secret which for some reason isn't published in the Dreamhost Wiki. But I stumbled upon it in the comments section of the old KB. I'm just racking my brain to remember what it was.
It's has something to do with a change you need to make in the Dreamhost Admin panel, something to do with users accounts a allowing remote access.
Sorry that's really vague. If I remember or work it out I'll post back here again.